Appendix
Introduction
Britain's railways are playing an increasing role
in UK transport, with over a billion passenger journeys a year,
in excess of a 40% increase over the last decade. After some difficult
times, performance is steadily improving. Passenger numbers are
continuing to increase, passenger satisfaction with the quality
of the service is rising and investment is at record levels.
We agree with the Committee's that fare structures
are unnecessarily complex and need simplification. We also believe
that this complexity damages passengers' perceptions of value
for money and we intend to work with train companies significantly
to improve this situation.
However, it is important to distinguish perception
from evidence. The Government believes that the evidence points
to rail offering competitively priced fares in a range of markets
that stand good comparison to the cost of travel by other modes.
It shows that operators are increasing revenues through volume
growth rather than any pricing up of captive markets. And it shows
that with over 40% of revenues regulated, and over 40% of rail
funding coming through direct subsidy, the Government is already
providing significant support towards the affordability of rail
travel
Recommendations and Responses
Rail fares in the bigger picture
THE STRATEGIC SIGNIFICANCE OF THE RAILWAYS
1. The affordability and attractiveness of rail
travel is likely to affect the ability of Government to achieve
broader economic and regional development goals. It is therefore
imperative that the railways are managed and priced in such a
way that they help and facilitate economic and regional development.
Given that the railways are now run as private semi-monopoly enterprises,
the Government needs to regulate actively to ensure that fares
policy works with the grain of broader Government policy and not
against it. (Paragraph 10)
2. If the Government is to entertain any hope
of achieving its targets on emissions and congestion, it is essential
for it to encourage a significant shift from road to rail. Rail
travel must be made affordable and user-friendly in order to encourage
people to reject cars in favour of rail. Ticketing policy is crucial
in achieving this public policy goal. (Paragraph 13)
The Government agrees that rail makes a significant
contribution to national economic, environment and social outcomes.
It also agrees that the costs of rail and the pricing of travel
are crucial factors in the success or otherwise of rail in delivering
these benefits.
The question of the competitive position of rail
operators is an important one, since it goes to the heart of whether
they have incentives to make prices attractive or not. This is
a position that the Government does - and will continue - to keep
under review. But the balance of current evidence strongly suggests
that, although operators may have a considerable degree of market
power within rail, most, if not all, train companies operate within
a wider active travel market. The Government's approach to regulation
(compatible with wider policies) is therefore only to regulate
where we believe that market elasticities are such that passengers
do not have realistic alternative travel choices. Predominantly
this is commuter markets (with travel choices being linked to
home ownership). Issues of Saver regulation are more complicated.
Nevertheless, regulated fares account for approximately
43% of all farebox revenues. The Government does not believe that
encouraging a modal shift to rail is a cause for subsidy in itself.
However, the Government does have wider objectives including those
related to environment or congestion towards which rail is well-placed
to make a contribution. These wider objectives are reflected in
that fact that currently over 40% of all rail costs are met through
subsidy.
The Government believes that these policies are having
results. Rail travel overall has grown by over 40% in the last
decade and rail mainlines are making significant inroads into
relevant air markets. A prime example is the investment made in
the West Coast Main Line, which is now delivering significant
modal shift. Since September 2004, journey times have been cut,
brand new trains introduced, and London-Manchester frequency doubled.
On-time performance now regularly exceeds 90%. Both passenger
numbers and revenue have risen rapidly, with increases in passenger
numbers in excess of 32% across the whole West Coast route network,
and they are still rising. As a result, the number of passengers
travelling between London and Manchester on short haul flights,
the least environmentally-friendly mode of transport, is declining
and airlines are starting to reduce the number of flights.
The report which the Government has commissioned
from Sir Rod Eddington will examine in detail the relationships
between further investment and economic (including regional economic)
growth. The Government will closely consider the findings of that
report.
The level of public subsidies for the railways
3. The railways are a public service in receipt
of substantial Government subsidies. In the spirit of a public
service, the railways should be affordable and accessible to all,
for walk-on, same-day or advance purchase travel. To achieve this,
the Government needs to police the train operators much more rigorously
than it has done to date. (Paragraph 14)
4. We accept that an increase in subsidies is
not in itself the solution to the problem of unreasonable rail
fares. We appreciate that the railways have to compete with many
other vital services such as schools and hospitals for Government
funds and we do not argue for French levels of railway subsidy.
We do, however, believe that the dogged pursuit of a policy to
minimise public subsidy risks the long-term viability of rail
services and undermines the proper public service function of
the railways. We need a balanced approach to rail subsidy which
allows investment where relatively small sums can produce significant
results. This should be accompanied by strong controls ensuring
that the Government gets good value for its money. There must
be no waste. (Paragraph 17)
We agree with the Committee that a balance needs
to be struck between subsidy and fares and that ever-higher subsidies
are not a solution in themselves. As indicated above, the costs
of the railway are currently split between 58% from fares and
42% from subsidy. The Government's priority, in line with the
Committee's observations, has been to focus on value for money,
promoting cost-control and cost-efficiency to the general benefit
of both fare-payers and taxpayers.
The Government also agrees that this focus on value
for money and the elimination of waste needs to encompass investment
and project delivery as well. Whilst very significant levels of
investment have gone into the railway over the past ten years
(including the modernisation of West Coast; the upgrade of the
southern power supply around London; 40% fleet replacement; and
the introduction of TPWS) there have been concerns about the efficient
delivery and phasing of some of these schemes. The picture is
improving as Network Rail's performance and the recent debate
about progress on the West Coast project serve to highlight. We
also believe that the publication of the High Level Output Specification
and Strategy next year will improve the phasing and efficiency
of major project decisions. Nevertheless, this must be a process
of continuous improvement; it is certainly not a case of "job
done".
The Government recognises the Committee's concern
to ensure that train operators honour their contracts. The Department
for Transport polices regulated fares effectively using an automated
system linked directly to the rail industry's fares database.
The system confirms that regulated fares have been set in line
with regulation. However, we want to extend our approach beyond
data collection. A key element will be to work closely with Passenger
Focus - including their plans for 'Mystery Shopping' - to better
understand customers' experience.
The Government also supports the proposition that
'turn-up-and-go' availability is a fundamental part of the railways'
attractiveness and utility. For this reason we are concerned to
monitor the balance of availability between open, walk-up and
advance fares, whilst recognising that each serve and are of value
to a particular market. Currently the proportion of usage on the
railway (all operators) is:
| Type of Fare
| Proportion of Usage (rounded)
|
| Season |
48% |
| First and Standard Open
| 18% |
| Saver/Cheap Day
| 29% |
| Advance
| 2% |
In part, of course, these figures reflect that much
of the railway does not seek to offer an Advance product (underlining
just how 'turn-up-and-go the railway as a whole remains). However,
even on those operators where Advance is offered, these ticket
types account for just 17% of transactions. Open tickets have
broadly the same level of usage at 21%.
Objectives of ticketing policy
5. We strongly urge that the Government revise
its policy on unregulated rail fares. The primary objective when
setting rail fares and fare restrictions must always be to maximise
the public benefit of the railways. This entails the greatest
possible number of passengers travelling at the cheapest possible
prices without raising public subsidies to unrealistic levels.
This is not synonymous with the maximisation of revenue or profit
for private operators. Given the natural preoccupation of private
operators with maximising revenue, it is the Government alone
which is able to safeguard a public service railway operated to
maximise the benefit to passengers and taxpayers. (Paragraph 21)
The Government does not intend to widen the scope
of fares regulation because we do not believe that this would
be necessary or effective to the objective of increasing rail
use without seeking to subsidise modal shift for its own sake.
We agree that private operators will be focused on
maximising revenue (along with cost control). That is entirely
beneficial and supportive of our objectives if the focus for such
revenue growth is increasing passenger numbers (by pricing at
an attractive level) rather than exploitation of a captive market.
In the past 10 years increases in revenue have indeed
come from market growth and, as pricing comparisons indicate,
evidence suggests that rail is priced competitively.
| 1995/
1996
| 2005/
2006
| Change
|
| | |
Absolute
| %
|
| Passenger Km (Billions)
| 30.0 |
43.2 | 13.2
| 44 |
| Passenger Journeys (Millions)
| 761 |
1082 | 321
| 42 |
| Total Farebox Revenue (£m '05/06 prices)
| 3049 |
4493 | 1444
| 47 |
| Average Fare Paid (pence/km '05/06 prices)
| 10.16 |
10.40 | 0.24
| 2.4% |
Although the table above shows average revenue per passenger km
has increased by 2.4% over the last decade, other data published
by ORR shows a real increase in ticket prices of 9.3% (over 11
years). The difference between the two figures can be explained
by the fact that the 9.3% reflects the price of all fares
offered whereas the 2.4% reflects what passengers have actually
bought. The combination of the tables suggest that passengers
are becoming more selective in their purchasing and keener to
take advantage of the cheaper products.
The table demonstrates that revenue increases have
broadly matched volume growth with the cost of travel (in pence/km)
rising slightly. The AA Motoring Trust suggests car running costs
(2006) are about 22p/km, even for a relatively cheap car.[1]
Where we believe that there is not an effective market,
fares are regulated. So the figures cited above represent an effective
balance of Government regulation, coupled with further market
growth in response to the competitive pricing of unregulated fares.
6. We believe the issue of industry efficiency
is crucial to controlling the levels of fares. We also consider
that too little attention is being paid to driving up efficiency
levels and controlling costs as a way of keeping ticket prices
down. Subsidies and industry efficiency are both crucial elements
in ensuring that the railways provide value for money to travellers.
(Paragraph 23)
The Government agrees that industry efficiency is
crucial. Network Rail have been set a target of improving efficiency
by 31% during the current 5-year regulatory control period to
2008/09 and they are on course to achieve this. The ORR is currently
reviewing the efficient targets for the next control period.
For train operators, the competitive franchising
process aims to secure increased efficiency as each franchise
is replaced. Evidence supports the effectiveness of this approach.
Whilst usage of the passenger railway has growth by 44% (and revenue
by 47% in real terms) over the last ten years, the real-terms
costs of the passenger railway have only risen by 37%. These volume
efficiencies have contributed to a fall in whole industry costs
per passenger/km of 6%.
However, the Government is not complacent and continues
to press on all fronts - whether Network Rail cost review, the
franchising process, or rolling stock charges - to identify areas
where the railway could be run more efficiently.
Railway Capacity and fares policy
7. The railways are suffering from considerable
capacity problems and bottlenecks in parts of the system. These
problems have serious consequences for the ability of Government
to achieve the level of growth in passenger kilometres needed
to meet other of its key objectives such as the reduction in emissions
and congestion. Capacity problems can also drive the ticketing
strategies of train operators, enhancing their ability to continue
to raise the price of a scarce commodity and thereby pricing many
passengers out of the market. The Government must ensure an increase
in railway capacity. (Paragraph 26)
Accounting, as it does, for only 6% of journeys (in
terms of passenger/kms) and <1% of Kyoto emissions, rail alone
cannot deliver our wider objectives on economic growth and the
environment. It does, however, have a valuable contribution to
make and we need it to maximise this contribution by attracting
passengers with attractive and competitive fares.
This also needs to be supported with effective investment
in building capacity. Significant improvements in capacity have
already been introduced in the last five years, helping to accommodate
the recent increases in train travel. Greater passenger-carrying
capacity has been introduced through new and larger fleets of
trains, for example on Trans-Pennine routes, Chiltern Railways,
South West Trains and Midland Mainline. Additional route capacity
enabling more trains to operate has been introduced through infrastructure
improvements, for example the upgrade of the West Coast Main Line,
with further improvements expected in two years' time when more
track works and re-signalling has been completed. Other infrastructure
capacity enhancements are being driven through a variety of Network
Rail schemes ranging from small local track and signal improvements
to major projects such as Kings Cross station.
The Government will set out its future plans on capacity
and investment in Summer 2007 when the Secretary of State intends
to publish a High-Level Output Specification (HLOS) for the passenger
railway. This will cover the years from 2009/10 to 2013/14, specifying
the capacity, reliability and safety improvements the Government
wishes to secure and setting out the funds available for this.
It will be accompanied by a strategy considering, inter alia,
capacity issues in the longer term.
It is worth noting that where capacity problems are
greatest, this tends to overlap with Government regulation of
fares (particularly on Commuter flows) so Train Operators do not
have freedom to price above regulated levels, which have themselves
fallen in real terms over the past ten years. However the Government
does believe that it is reasonable over time for fares to reflect
the levels of investment being committed to the railways, particularly
as the benefits of those investments start to be realised.
The complexity of rail fares
Unregulated fares
8. The current complexity of unregulated fares
and conditions is an insult to the passenger. It is unacceptable
that in order to purchase a rail ticket passengers are faced with
up to a dozen different products, most of which have subtly different
conditions and restrictions. Adding to the insult, operators not
only market an unwieldy range of slightly different products,
but in some cases, identical products are marketed under different
names. The fact that this situation has been allowed to develop
unchecked over a number of years demonstrates a lack of commitment
from both train operating companies and the Government to the
best interests of rail passengers. (Paragraph 31)
Creating a user-friendly structure
9. Train operators must take urgent action to
implement a unified fares structure across the entire industry.
This should involve no more than a handful of different fares,
and names and restrictions should be identical across the network
making the system user-friendly and transparent for passengers.
(Paragraph 34)
Initiatives to improve the problem of fares complexity
10. The Committee is not sanguine about the industry's
capacity to create a uniform, coherent, and successful system
of fares and conditions without Government regulation. The assertion
by some train operating companies that the current level of complexity
is caused by the old reservations systems being incapable of handling
a simple fares structure is not credible. Under British Rail,
the system was capable of managing a simple fares structure, but
that is apparently no longer so. We believe that the level of
complexity arises from a different cause entirely. In our view,
it is inherent in the privatised and fragmented industry that
different operators will wish to apply different conditions and
restrictions which optimise the commercial advantage of their
individual franchise. Where no regulation is applied, such commercial
considerations will invariably win out over considerations of
consistency and ease of use for the customer. The experience of
the past decade gives us no reason to think otherwise. Government
regulation is required to ensure that all train operating companies
adhere to one simplified fares system so that passengers can travel
with easily identifiable fares across the entire network. (Paragraph
38)
Reducing complexity through regulation
11. We do not accept the view that a Government-imposed
harmonisation of fares categories and conditions would unduly
reduce the scope for innovation. There is not a shred of evidence
to imply that a clear, comprehensible and transparent framework
of ticket names and conditions will reduce the scope for product
innovation, as is suggested by the Department. Rather, such a
framework would serve to improve customer satisfaction. It is
imperative that the Government take steps to enforce a degree
of harmonisation of ticket names and conditions on all operators.
(Paragraph 40)
Regulated fares
12. We believe that the greater stability and
clarity of fares' names as well as the restrictions and conditions
of travel for regulated fares such as commuter fares and Saver
fares is an illustration of the potential benefit of a tighter
regulatory framework for rail fares in general. (Paragraph 43)
The Government agrees with the Committee that rail
fares appear needlessly complex, particularly for longer distance
journeys. We have been working with the Association of Train Operating
Companies (ATOC) and train operators to address three key issues:
1. Fares structure: Establishing a simple, logical
and consistent fares structure across all long-distance train
operators.
2. Fares terminology: Using the same terms used
to describe a smaller number of generic ticket types so that passengers
know which fare to ask for.
3. Fares presentation: Modifying industry systems
and passenger information sources to make use of this simplicity,
by showing only the relevant fares for the journey requested.
The Government sees no reason why this cannot be
achieved within the current contractual and commercial framework.
Train operators have already been working towards these goals,
and since June 2006, all long distance operators have had a similar
basic fares structure:
1. Open fares: Fully flexible. Any train, any
day, any time. Walk-up, can be bought any time. Break of journey
allowed in both directions. Refundable less an admin fee.
2. Saver fares: Off-peak flexible. Any train
at weekends, any train outside the business peaks Monday-Friday.
Walk-up, can be bought any time. Break of journey allowed in return
direction only. Refundable less an admin fee.
3. Advance fares: Non-flexible, only valid on
the train booked. Can be booked until 18:00 the day before travel.
Departure time can normally be changed for a fee. Generally non-refundable,
break of journey not permitted.
However, this simple structure is not yet being actively
promoted by train operators, so at present it is delivering limited
benefit. The next step is to improve the way fares information
is presented on retailing and online systems to make it easy for
passengers to understand the choice between these three types
of rail fare. National Rail Enquiries online (www.nationalrail.co.uk)
is the nationwide train travel website where passengers can find
train times and fares for all operators' trains on all routes.
It currently shows all the possible fares for each train, whether
that fare is available or not, mixing first and standard class
fares. New journey planning software to be implemented on www.nationalrail.co.uk
later this year will allow more flexibility in the way fares information
is presented. Unless the user asks for more information, it should
then be possible to show only the relevant fares for each train
(for example, the Open, the Saver and the cheapest available Advance
fare in the class requested), highlighting the simple choice of
flexibility versus price represented by the Open, Saver and Advance
fares. The long distance operators are considering how to make
similar changes to their own websites.
On shorter distance routes, a simple peak and off-peak
fare structure (Day Single/Return and Cheap Day Single/Return)
has existed unchanged for many years, generally understood by
most passengers. Building on this, the Government is working with
train operators and Transport for London to further simplify National
Rail fares within London. The Government plans to establish a
simple zonal fares structure, based on the familiar Travelcard
zones, potentially from January 2007.
The value for money of rail travel - real and
perceived
Summary of price developments since 1995
13. The trends since 1995 demonstrate clearly
that when fares are unregulated, there is a tendency for prices
to rise faster than inflation. Fares on long-distance routes and
first class fares have been the worst affected by price rises.
This trend appears to continue relentlessly. Furthermore, the
differences in fares increases on different routes have been startling.
This has created a situation where the price for travelling a
100 mile journey on one route might cost significantly more than
on another route, even where the quality and speed of the service
is similar. This is neither fair nor in the best interests of
passengers. (Paragraph 47)
The Government disagrees with these conclusions.
Trends between 1995 and 2003/04 do not 'demonstrate
clearly that when fares are unregulated, there is a tendency for
prices to rise faster than inflation'. The cheapest of the Advance
fares, which are not regulated, have fallen by 32% in real terms.
Fares on long distance routes and first class have
not been 'the worst affected by price rises'. On long distance
routes cheapest fares are now lower in real terms than they have
ever been and a new range of discount First Class fares have become
available.
And for price to vary in comparisons between journeys
of similar, distance, speed and quality reflects rational and
efficient market behaviour, rather than market failure. This happens
for air, coach and ferry travel - even for road tolls on the Continent.
It also reflects the current railway rolling forward the pricing
practices operated by the nationalised one. British Rail also
used to differentiate pricing according to a range of factors
other than distance, including comparative market strength and
levels of relevant investment.
Clearly, these first two examples largely seek to
highlight the cheapest elements of the book-ahead end of the market
and are not the whole picture. It is certainly valid to highlight
that the most highest-rising First Class fares have risen by 39%
over the same period, just as regulated fares have fallen by 3%.
All of this underlines the point that general conclusions on pricing
need to take account of the full range of products and the volume
of transactions in relation to each of these.
The tables below show some of the travel and pricing
options for a range of journeys:Modal
Comparisons for Journeys between UK Destinations
| Travel London to Manchester (Return) Prices are Rounded
|
| Air Open | Train Open
| Car | Train Off Peak
| Coach | Train Cheapest
|
| £269 | £202
| £76 | £57
| £27 | £25
|
| Travel London to Newcastle Upon Tyne (Return) Prices are Rounded
|
| Air Open | Train Open
| Car | Train Off Peak
| Coach | Train Cheapest
|
| £249 | £215
| £105 | £91
| £42 | £20
|
| Travel London to Plymouth (Return) Prices are Rounded
|
| Air Open | Train Open
| Car | Train Off Peak
| Coach | Train Cheapest
|
| £232 | £197
| £81 | £64
| £43 | £26
|
| Travel London to Swindon (Return) Prices are Rounded
|
| Air Open | Train Open
| Car | Train Off Peak
| Coach | Train Cheapest
|
| £82
| £35 | £37
| £23 | £15
|
| Travel London to Canterbury (Return) Prices are Rounded
|
| Air Open | Train Open
| Car | Train Off Peak
| Coach | Train Cheapest
|
| £37
| £29 | £21
| £17 | £18
|
| Travel Liverpool to Edinburgh (Return) Prices are Rounded
|
| Air Open | Train Open
| Car | Train Off Peak
| Coach | Train Cheapest
|
| £302 ( from Manchester )
| £89 route Preston |
£76 | £55 route Preston
| £36 | £30
|
| Travel Birmingham to Glasgow (Return) Prices are Rounded
|
| Air Open | Train Open
| Car | Train Off Peak
| Coach | Train Cheapest
|
| £277 | £143
| £98 | £89
| £56 | £34
|
| Travel Leeds to Southampton (Return) Prices are Rounded
|
| Air Open | Train Open
| Car | Train Off Peak
| Coach | Train Cheapest
|
| £268 | £133 Not London
| £79 | £82 Not London
| £50 | £30 Not London
|
Notes
Air Open.
Fare queries were made using the OPODO website
which is owned by British Airways, Air France, Alitalia, Iberia,
KLM, Lufthansa, Aer Lingus, Austrian Airlines, Finnair and Amadeus.
The requests were made for travel one day hence, and for journeys
to be made at peak times.
Train Open, Train off Peak & Train Cheapest.
All fares taken from "RJIS" Rail Journey
Information System holding current fares and products sold by
the industry. The rate for the "Train Cheapest" fare
return is actually the cheapest advance purchase single ticket
doubled.
Car.
Costs are based on 2 people sharing in a car whose
purchase price was £10k. The figures were obtained from the
AA website using their 2006 costs of motoring set against the
mileage for the trip. The London Congestion Charge and other tolls
as applicable have been included. It is assumed that the return
trip was done in a day and so there is only one set of LCC or
tolls in the gross figure. No assumed parking costs.
Coach.
These prices were taken from the National Express
coach website and are all quoted from their Standard Return range
of fares.
The Government believes that these examples (which
are intended to be representative) are not indicative of pricing
which is either unfair or against the interests of passengers.
On the contrary, they show rail offering good value
products in a range of markets allowing people to make choices
which might trade time and convenience for price, whether within
rail or across modes. It is also worth noting the comparative
volumes of transaction. These show that the highest fares are
used by the smallest numbers; most passengers benefit from discounted
fares and the majority of those fares - and certainly the cheapest
ones - are unregulated. Cheap seats, both bookable and turn up
are generally available, including on some of the busiest trains.
The announcement of 2006 fares increases
14. It would appear that the train operating companies
deliberately chose to wait until the Committee's hearing on train
fares had been concluded before announcing yet another round of
well-above-inflation hikes in rail fares. If so, this was both
unhelpful and irresponsible. Our hearing was an excellent opportunity
for the train operators to debate the grounds of their pricing
structure and any further price increases. Instead, they chose
short-term presentational gain over transparency and credibility.
We find this behaviour immature and disappointing. (Paragraph
50)
This is a matter for the train operators.
Perceived value for money of rail travel
15. The persistently poor levels of passenger
satisfaction with the value for money of rail travel are important.
If passengers perceive rail travel to be too expensive, then in
some senses it is too expensive, and it may reasonably be assumed
that they will try to avoid paying the set price - if not in the
short term, then in the longer term. Passengers' perception of
pricing is therefore crucial to the long-term outlook for the
railways. (Paragraph 53)
Passenger growth and satisfaction despite poor
value for money?
16. Passengers are fully capable of distinguishing
between different aspects of the service they receive, and overall
satisfaction is a measure of a whole range of things including
punctuality, general comfort in addition to value for money. Over
the five years since the Hatfield crash, the situation on the
railways has improved from appalling through to just bearable
in terms of punctuality and passenger comfort. As a result, while
overall passenger satisfaction has improved, satisfaction with
value for money has not. (Paragraph 56)
17. Unlike the Minister and the train operators,
we do not accept the notion that the growth in passenger numbers
is an unambiguous indication that train operators are performing
well or even adequately in terms of value for money to the passenger.
People travel by train for a variety of reasons. In some cases,
they have no real choice. Increasing congestion on the roads and
the difficulty in parking in built-up areas has made travel by
car a more difficult option in many cases and on many of the routes
where people opt to travel by train, neither air nor coach constitute
realistic alternatives to rail. (Paragraph 57)
First, the Government strongly refutes the description
of reliability and passenger comfort as 'just bearable'. This
does not reflect average performance in excess of 90%. It does
not reflect the most modern fleet in Europe. And it does not reflect
customer perceptions where 80% of passengers declare themselves
satisfied or better with their overall journey.
The Government recognises that, when separated from
the overall journey, satisfaction as to the value for money of
rail fares is the lowest of all passenger indicators. Only 58%
of leisure travellers and 41% of business travellers declare themselves
satisfied or better.
This is disappointing but should not necessarily
drive fares policy. It is important to remember in relation to
the leisure market that the price of cheapest fares has fallen
by up to 32% in the last decade with the price of Savers (in common
with other regulated fares) having fallen 3%. For commuters prices
have also fallen 3%. Business prices have increased substantially
- by up to 39%. Overall, rail fares (in terms of the actual cost
of travel to passengers) have risen by just over 2% whilst over
the same period GDP per head has risen by 26%.
At the same time the proportion of subsidy has risen
significantly. Most taxpayers are at best, infrequent users of
the railway; 73% percent of the population travel by rail at most
once or twice a year, whilst over 50% use the railways once a
year or not at all. Even substantial price reductions would not
fundamentally alter those travel patterns. So subsidy is essentially
redistributing cost and benefit between a large pool of people
who get limited or no direct return and a smaller group who travel
frequently. That is not to say that there are not wider benefits
which justify subsidy but it is an important discipline to balance
the direct and indirect costs and benefits of rail carefully mindful
of both direct and indirect benefits.
That said, we do accept the Committee's reasoning
that passenger perception has a weight in and of itself. We believe
rail has a good story to communicate and offers some very attractive
deals. But we also believe that the complexity of the fares structure
and barriers to easy purchase hamper the communication of this
message. All things being equal, complexity may well increase
the risk of mis-selling. It can certainly serve to create a distrust
in passengers that they don't have the best deal, or that the
person sitting next to them has got a better one.
In common with the work we are doing with the operators
to simplify fares structures. We want to encourage them to be
clearer about prices and the applicability of railcard discounts.
We also want to encourage them to consider how they respond to
passengers in the event that they are sold an unnecessarily expensive
a ticket by mistake.
International price comparisons
18. On the whole, there is little doubt that walk-on
rail fares in the UK are more expensive than in many European
countries. (Paragraph 58)
19. International comparisons can only take us
so far. What matters is how the price of rail travel in the UK
compares to other modes of travel here, and whether passengers
believe they get value for money when they travel by train. The
emphasis must be on train operating companies delivering a cost
effective, streamlined and attractively priced fares structure
which provides value for money, and on the Government delivering
a framework which supports such services and protects passengers
actively against sharp practices by the industry. (Paragraph 60)
International comparisons can indeed be misleading.
The most expensive UK Open fares are often compared with European
standard fares. However, to take inter-city routes as a comparison,
Open fares are bought by just 17% of UK passengers, whereas the
European standard fare is often the fare paid by the majority
of European passengers. Saver fares, bought by 31% of UK inter-city
passengers and also a walk-up product, are often less than German,
French or Swiss fares. UK Advance fares, used by 17% of UK passengers,
are often much less than the price paid abroad.
Around London and other big cities, commuter fares
are regulated. The overall price of these fares is the result
of a decision on what share of the cost will be paid by the passengers
who use the service, and what share by the taxpayers who may not
use the service, but who may benefit in other ways. Some countries
choose a different balance between taxpayer and passenger, often
funded by higher levels of taxation. It is notable that by itself
this does not automatically drive better performance, growth or
standards of maintenance. In regulating commuter fares in the
UK, the Government aims to balance the interests of passengers
with those of taxpayers.
Inter-modal price comparisons
20. We urge the Government to review the comparative
costs of travel by different modes in the UK and to ensure that
mechanisms are put in place to ensure a reasonable price balance
between modes, reflecting strategic policy priorities such as
limiting emissions. This may involve increasing subsidies for
one or more modes whilst taking measures to increase the cost
of using other modes. This kind of joined up approach would promote
transparency in the debate over the true costs of different transport
modes, and assist the Government in achieving its broad strategic
policy objectives such as regional development and a reduction
in road congestion and emissions. (Paragraph 62)
Supported by the kind of comparisons cited earlier,
the Government does believe that a reasonable balance of pricing
and access exists between modes. Where wider benefits or policy
objectives exist the Government has been willing to purchase these
through subsidy or grant. Freight grants are one such example,
but this approach is also demonstrated in level of subsidy support
to rail (as discussed in paragraph 6) as well as developing thinking
in areas such as road pricing.
Value for money of rail travel - a lottery?
21. Rail travel in the UK ten years after privatisation
is perceived to be poor value for money. And for those passengers
who do not succeed in getting cheap advance purchase tickets,
train travel is poor value for money compared to other modes of
transport. It is clear beyond reasonable doubt that walk-on fares
in the UK are more expensive than equivalent tickets in many other
European countries. (Paragraph 64)
22. We appreciate that a small proportion of the
lowest fares are sometimes available through advance purchase
tickets. We also understand the need to spread passenger usage
across the day. But not everyone is able to plan their journey
weeks in advance to take advantage of such cheap prices. Train
operating companies need to provide cheap tickets on all services,
not just a few off-peak services. It is imperative that reasonably
priced open walk-on fares are re-instated so that nobody is excluded
from using the railways for trips which cannot be booked in advance.
We recommend that the Government take measures without delay,
through franchise agreements, to cap open walk-on fares. (Paragraph
65)
As discussed elsewhere, the Government does not necessarily
accept that fares offer poor value for money, or compare unfavourably
to European counterparts, especially in light of wider choices
between the balance between fares and subsidy.
The Government also thinks that the Committee's conclusions
understate the availability and flexibility of pre-book fares.
These account for 17% of all travel and between. They can be bought
up to 18:00 the evening before.
Nevertheless the Government does agree that there
is also a role for reasonably priced walk-on fares. These exist
at present in the Saver market and both Government and operators
see this type of fare as important going forward.
However, the Government does not believe that there
is a case for capping Open fares; indeed there may be arguments
for looking at whether Saver regulation itself enables rail to
respond flexibly enough to passenger choice and demand. Open tickets
are used for fully-flexible travel during the Monday-Friday business
peaks and appear to be set at reasonable economic rates (i.e.
at a level reflecting modal competition), taking into account
the wider market and the cost of providing the necessary infrastructure.
Regulating to reduce such prices would not only add to the underlying
subsidy cost for rail but also create additional investment pressures
to meet the resultant increases in demand. The Government does
believe that there are strong economic reasons to invest in rail
to respond to demand. But it does not believe that those benefits
and costs would remain positive if the level of demand on such
routes was being additionally stimulated by price subsidy at levels
below a competitive market rate.
In practice, all travellers, by whatever mode, are
making choices between cost, flexibility, journey time and comfort
etc. It is important that the choice offered to passengers is
made more clearer and more to enable them to easily make the real
trade-offs that represent value to them and thereby make appropriate
modal - and ticket - choices.
Short and long-term effects of ticket prices (elasticity)
23. We fear that the current level of rail fares
will have far-reaching long-term consequences because it restricts
unreasonably people's options of where to live and work, where
to locate or manage businesses. This could potentially hamper
regional economic growth and reduce the popularity of rail in
the long term. (Paragraph 68)
24. In order to ensure that commuting on the railways
remains an option for as many passengers as possible, we urge
the Government to reverse the changes in the regulation of commuter
fares so that the permitted annual increase is brought back down
below the level of inflation. (Paragraph 69)
The Government does not believe that its regulation
of commuter fares is hampering economic growth or unreasonably
limiting housing choices. In 2006, commuter fares are on average
3% less in real terms than they were ten years ago, and the average
price paid per kilometre has risen by just 2%, whilst GDP per
head has gone up 26%. Far from declining, the number of people
using trains to commute is steadily increasing, and forecasts
suggest that demand for rail will continue to grow for the foreseeable
future. The key challenge is to make sure that there is sufficient
capacity to accommodate continued steady growth. This will be
central to the Rail Strategy White Paper which the Government
intends to publish next summer, in light of the report by Sir
Rod Eddington into the relationship between transport infrastructure
and economic growth.
Evidence-based debate
25. We urge train operating companies to make
publicly available their research into elasticity, and in particular
their Passenger Demand Forecasting Data and Handbooks. Given that
this information is shared by the entire industry, there could
be no competitive disadvantage in this data being in the public
domain. We are concerned that the unwarranted secretiveness of
the industry is hampering an open evidence-based public debate
about fares policy. (Paragraph 71)
26. We also recommend that the Government commission
its own independent and publicly available research to evaluate
the long-term elasticity of rail-fares as well as the propensity
of Train Operating Companies (TOCs) to prioritise short-term revenue
over long-term passenger retention. Such research must be placed
in the public domain so that fully informed external scrutiny
of TOCs can be undertaken. (Paragraph 72)
British Rail combined its research findings on elasticity
and other factors affecting demand into a document called the
Passenger Demand Forecasting Handbook (PDFH). Today, train operators
and the Department for Transport form the group which maintains
this document and which from time to time commissions new research
from independent and respected academic sources to ensure this
is up to date. It is helpful that this research is shared between
train operators and the Department for Transport as a common basis
for discussion. However, the information it contains is commercially
sensitive, and could be used by competing air and coach markets
to rail's disadvantage.
Additionally, the Department has put together a research
programme to develop its own understanding of the relationship
between fares and other demand factors. The first phase of this
work is due to report in early 2007.
The management and pricing of key rail fares
Walk-on fares
27. The ability to turn up and go without notice
is a vital characteristic of the railway. Without walk-on fares,
the railways would have no hope of competing with road travel.
What most passengers need first and foremost is flexibility and
ease of use, and walk-on fares provide the easiest and most flexible
way to travel. (Paragraph 75)
Open fares
28. It is essential that when rail passengers
walk up and buy a ticket immediately before departure, they do
not have to pay over the odds. Fully flexible open fares may need
to command a price premium over other less flexible tickets, but
the prices now charged by many long-distance operators are absurdly
high. The 'see how much we can get away with' attitude of operators
has put the thumbscrews on those passengers who have no option
but to travel on peak-hour trains, using fully flexible Open fares.
Such behaviour has brought not only individual train operators,
but the passenger railways in general into disrepute. Train operating
companies bear a heavy responsibility for giving passenger railways
a bad reputation. Over and above our earlier recommendation for
the Government to cap open walk-on fares, operators themselves
must now take action to develop reasonable pricing structures
for open flexible fares. (Paragraph 78)
Saver fares
29. We find it hard to see how Saver fares that
are easy for passengers to understand and use, universal across
the network, and good value for money can be seen to prevent the
development of more "customer focused products". What
could be more 'customer focused' than the Saver fare? We are therefore
deeply concerned about proposals to reform or even abolish regulation
of Saver fares. It is imperative that Saver fares, which are the
only remaining affordable walk-on fare on our railways, are ring-fenced
and protected. It is the Government's duty to tax-payers and passengers
to provide this protection. (Paragraph 83)
30. We note the claims of some Train Operating
Companies that they would retain Saver fares if they were de-regulated.
We have little faith in these assertions. Savers have already
been eroded in many cases by ever narrower time-of-travel restrictions
imposed by train operators. We strongly suspect that in a de-regulated
market, Saver fares would eventually be eroded to the point of
irrelevance because operators would be tempted to apply ever stricter
conditions and restrictions on their use, making these tickets
difficult for passengers to use. (Paragraph 86)
31. If Saver fares were eroded further, passengers
are likely to be pushed onto much more expensive open tickets,
or onto advance purchase tickets which are cheap but inflexible.
The former would be likely to increase the revenue per passenger
for train operators whilst the latter would increase predictability
and make it easier for them to manage passenger demand across
the day. Needless to say, the passenger would be the loser in
both circumstances. We therefore recommend not only that the Government
retains regulation of Saver fares, but that it takes immediate
steps to strengthen the current regulatory regime in order to
limit the kind of travel restrictions that train operators are
able to impose, and to ensure that travel restrictions are the
same for Saver tickets across all operators on the network. (Paragraph
87)
Advance purchase tickets (APEX)
The limitations of advance purchase fares
32. Advance Purchase rail fares are here to stay.
We acknowledge the benefits that such fares may have for some
leisure travellers, and we also accept the need to make off peak
services attractive to as many passengers as possible. Cheap advance
purchase fares are a sensible way to fill up off-peak seats that
otherwise would not be sold, but this must never be to the detriment
of affordable walk-on fares. The latter must once again become
the mainstay of rail travel if the railways are going to compete
with the motorcar and be affordable to the general public for
routine journeys. The Government needs to develop the regulatory
framework to ensure a sound and passenger-friendly balance between
off-peak bargains and user-friendly and affordable services every
day of the week. (Paragraph 92)
Yield Management
A win-win situation?
33. 'Yield management', the system now used by
train operators to maximise their revenue for every seat, serves
train operators by helping to maximise revenue and profit. It
serves the Government by helping to minimise the need for Government
subsidies. It also serves some passengers who are in a position
to benefit from cheap advance booking fares with complex restrictions.
The system, however, clearly fails all those passengers who have
less predictable and flexible travel needs and who end up paying
over the odds to travel. (Paragraph 105)
34. A system for managing railway capacity and
fares which puts financial outcomes for train operators or the
Government on a par with, or even before, the needs of passengers
is a retrograde development. Meeting passenger needs should be
the primary and overarching objective of a public service railway.
Therefore, whilst we appreciate the positive contribution of 'yield
management' systems in utilising the capacity of the railways
effectively by providing incentives for those who are able to
travel outside peak hours to do so, we believe that train operators
are taking the system far further than is required purely for
the purposes of using capacity effectively. Driven purely by economic
models of revenue maximisation, the premiums attached to walk-on
and peak-hour travel have risen so high that many passengers are
unable to afford them. This is nonsensical. It is incompatible
with what ought to be the key public service objectives of our
railways. This problem is inherent in the current structure of
our railways, and short of altering this structure, broader and
tougher regulation is the sole practical way of ensuring that
the passenger is given proper priority. (Paragraph 106)
The Department for Transport knows the importance
that passengers place on the availability of flexible walk-up
fares. Turn-up-and-go train travel provides the flexibility which
people need when they make a range of journeys.
For the reasons cited earlier, the Government is
not attracted to price capping of fully-flexible fares. Whilst
these are at the highest end of rail costs, they are not disproportionate
to the cost and convenience of other travel choices which is why
they continue to prove popular in their core business market.
It is recognised that this market has a flexibility of choice
that is not open to all passengers at all times. However, the
is no evidence to suggest that the incidence of people who genuinely
have to travel for some broader social purpose at these times
and can only do so by rail and have no scope to plan this up to
18:00 the night before or flex their journey an hour or two in
either direction, is sufficiently large to justify further subsidy
for peak pricing to reduce the price to a level that such passengers
may prefer, or be able, to pay. On longer distance routes, the
majority of passengers plan and book their trip in advance, even
if they go on to buy a walk-up ticket.
Research by Passenger Focus suggests that 'Saver'
fares do not themselves have a high brand recognition. But this
is not to say that the concept of a cheap turn-up and go ticket
is not valued; clearly it is.
There are, however, legitimate questions that can
be asked about whether such a product should have the same pricing
level whatever the demand for the train (causing very high crowding
on the 'last Saver' trains, whilst other trains remain under-utilised
at, or because of, current Saver pricing levels) and whether passengers
should be locked in for paying for the whole of a return journey
on a turn-up-and-go basis even if their need is more limited or
flexible than this. Linked to this should be consideration of
whether patterns of travel now being experienced in the peaks
over the course of the week (driven by the characteristics of
today's labour market, as opposed to that of ten years ago) are
properly reflected in the regulatory structures, for instance
locking part-time workers into 7 day products whilst continually
attracting demand to the busiest trains.
We believe that it is important such issues are properly
and objectively considered as part of an ongoing process of discussion.
We do agree with the thrust of the Committee's conclusions that
de-regulation on the basis of assertion or speculation would be
undesirable and could lead to passenger detriment. Fares regulations
are kept under continual review and there will continue to be
areas in which changes, different approaches or greater flexibilities
could bring passenger benefits. Fares, like anything else, need
to evolve over time. But both Government - and most importantly,
passengers - need to have confidence in the objectives and credibility
of outcome of any changes to ensure they deliver benefit.
Group travel
35. Train operators have made it far too difficult
for schools and colleges to undertake study trips using the railways.
Instead of encouraging the young to use the railways for study
purposes, barriers are put in their way. This is yet another case
where we believe minimum standards should be guaranteed through
Government regulation. Evidently train operators put revenue and
profit before elementary social responsibilities. (Paragraph 96)
Train operators usually have specific departments
dedicated to making arrangements for schools and groups, which
is often important business for them. However, capacity is limited,
and it may not always be possible to place large groups on trains
in the Monday-Friday peak hours. The Government supports train
operators in providing group discounts and other facilities for
schools and groups, but operators need to balance the wishes of
schools and groups with the interests of their regular passengers.
Quotas
36. Passengers have suffered for years from a
severe lack of transparency about the availability of cheap advance
purchase fares. This has prevented them from making informed decisions
and obtaining the best tickets available. We note that train operators
are now in the process of launching new and improved systems.
We are also conscious, however, of the limitations imposed by
'yield management' systems in terms of the information that can
be supplied to passengers. We will return to look at rail fares
again next year, and we will expect to find substantial improvements
in terms of the information available to passengers about the
availability of cheap fares. We want to see a system where passengers
can identify easily and quickly how they can travel most cost
effectively within a three day period, that is, what departures
have the cheapest fares, and what the restrictions on these tickets
are. (Paragraph 110)
We agree that improvements need to be made to rail
industry retailing systems to make buying train tickets more transparent
for passengers, and to make selling rail travel easier for staff.
New retailing systems which integrate train times and fares are
being installed at ticket offices and telesales centres. These
systems show availability for yield-managed fares, making it easier
to sell this type of product. However we believe that more can
be done and we will continue to work with train operators to achieve
better communication to the passenger.
An increasing number of long distance train tickets
are bought online, which is an ideal medium for showing what is
available at what price. On websites such as www.nationalrail.co.uk,
the availability of all Advance quota-controlled fares on each
train can be seen against each train. If improvements to the presentation
of fares information are made as described in paragraph 14, there
is no reason why buying cheap train tickets should be any more
difficult than buying cheap air, coach or ferry tickets, which
will benefit both passengers and train operators.
Fundamentally, these issues are linked to the need
for clearer marketing of a simplified fares structure, the restrictions
of which are properly communicated. Given that most passengers
do plan their journeys in advance they ought to be encouraged
and assisted towards buying the best-priced ticket for that journey
or at least making an active choice about additional flexibility
in relation to cost.
Availability of advance purchase tickets for festive
periods
37. Train Operating Companies have been holding
passengers to ransom during the festive season where many passengers
have particularly important travel needs. Christmas is a time
when many people can ill afford to pay large sums of money to
travel to see family and friends, perhaps as their main annual
journey. The lack of clarity and information for passengers about
where and when seats are available is disappointing at this time
of year. (Paragraph 114)
38. We have the distinct impression that the frequently
chaotic rush for limited numbers of good value seats on departures
other than the most unsocial hours is positively encouraged by
train operators, perhaps because it leads passengers to buy more
expensive fares than would be the case if the purchasing arrangements
were more straight-forward. It is imperative that train operators
provide much clearer up-to-date real-time information to passengers
about the availability of different fares on individual departures
in the run-up to very busy periods such as the festive season.
(Paragraph 115)
The Government acknowledges that travel during public
holidays can be difficult for infrequent travellers. Traditionally,
public holidays have been the time when heavy maintenance or renewal
is carried out on the railways, resulting in train service alterations.
However, the Government expects Network Rail to fulfil its obligation
to release its timetables 12 weeks in advance so that passengers
can plan their journeys and train operators can open reservations
8 or 9 weeks in advance. This applies throughout the year, but
especially at times of high demand such as Easter and Christmas.
Passengers can check availability online at www.nationalrail.co.uk
or by calling train operators' telesales lines. Train operators
have no obligation to sell unregulated cheap tickets, but it is
commercially beneficial as they would otherwise lose passengers
to air, coach and car. Train operators lose out as well as passengers
if they are unable to sell their planned range of tickets.
Collection of due fares
39. We are concerned over the lack of commitment
by train operators to the collection of fares across the network.
It is vital to collect the fares that are due in order to prevent
unnecessary price hikes for law-abiding passengers who do pay
for their travel. The industry must look carefully at its collection
and enforcement levels and make improvements as a matter of priority.
(Paragraph 117)
The Government agrees with the Committee that effective
revenue protection is essential. For this reason, since 2004 all
new franchise agreements require the operator to monitor their
ticketless travel levels on each route, and to produce and maintain
a revenue protection strategy.
Automatic ticket barriers have proved one of the
most effective ways to protect revenue, and in addition have been
shown to significantly reduce crime and vandalism on the network.
We are ensuring that automatic ticket barriers are installed at
Waterloo as part of the new South West Trains franchise, Waterloo
being the most important station in London still without such
barriers. We expect to see control and validation infrastructure
becoming increasingly important and prevalent as the railway progresses
towards the opportunities offered by wider use of Smartcards.
Timetabling and the 'T-12' issue
The obligation for Network Rail to make timetables
available
40. The importance of timetables being made available
to passengers in a timely fashion has increased significantly
with the growth in advance purchase tickets. Advance purchase
tickets are sold only with a seat reservation. It is therefore
essential that the timetable for the specific train and date is
available at the time of booking the ticket. If the timetable
is not available nine weeks ahead of departure, the passengers
cannot book their tickets, and may as a result miss out on the
best value fares. (Paragraph 121)
The T-12 recovery
41. Network Rail has made progress towards meeting
the obligation to release timetables 12 weeks before the date
of travel (T-12). This is no time, however, for the industry to
rest on its laurels. The obligation is not met for six out of
28 operators, so the 'Informed Traveller' requirement is not being
met in more than 20% of cases. Whether or not advance purchase
fares are common on these particular routes, passengers will be
disadvantaged if travel information is not made available to them
at the required nine weeks before departure so that they can plan
their travel itineraries. (Paragraph 125)
42. The recovery process is clearly far from complete,
and Network Rail needs to up its game. Failures to release timetables
the required 12 weeks ahead of travel must become a thing of the
past, not a recurring phenomenon. When we return to the issue
of rail fares next year, we will expect to find that the remaining
problems in this area have been resolved satisfactorily, and progress
to date sustained. (Paragraph 126)
The adequacy and sustainability of the T-12 recovery
43. We have concerns about the robustness of industry
performance in achieving T-12 and T-9 (that is the requirement
of Network Rail to release timetables to train operators 12 weeks
before departure and for train operators to release timetables
to passengers nine weeks ahead of departure). We urge the Office
of Rail Regulation to evaluate carefully what further action is
required to shore up current performance in the delivery of timetables
and to guarantee consistent future delivery. (Paragraph 130)
44. In the event of future failures to meet the
T-12 and T-9 obligations we believe train operators should be
obliged to offer alternative solutions at advance purchase price
levels to passengers who are unable to make advance purchase bookings
within the time-frame normally applied. We also believe that the
industry needs to consider carefully whether the T-9 timeframe
is out-of-date and booking services need to open at an earlier
stage. (Paragraph 131)
The Government agrees with the Committee that achievement
of T-12 is essential if passengers are to have the information
they need, and to buy tickets, in sufficient time before their
journey. We will continue to support the Office of Rail Regulation
in monitoring and enforcing this obligation.
A decision to open reservations more than 9 weeks
ahead is a commercial matter for train operators. There may be
practical issues to resolve if the timetable cannot be confirmed
earlier than 12 weeks ahead. Reservation for most European trains
open 60 days in advance, though some trains open 90 days ahead.
Uniquely, Eurostar now opens reservations 120 days ahead.
Regulatory complexity and weakness
A complex structure of regulation
45. The abolition of the Strategic Rail Authority
(SRA), as recommended by our predecessors, has helped to simplify
the regulatory framework for the railways. In some areas, however,
notably fares and ticketing, there remains scope for confusion.
This complexity is only compounded by the fact that, in competition
matters, the power to make judgements and enforcement decisions
is shared between the Office of Rail Regulation (ORR) and the
Office of Fair Trading. Despite reassurances from the ORR, we
are not convinced that a regulatory framework of this level of
complexity is effective and efficient, let alone intelligible
for passengers who wish to raise issues or complaints. We urge
the Government to look at the structure again, with specific reference
to fares and ticketing, and to simplify the system. (Paragraph
136)
The lack of powers to control prices
46. The ability of the Office for Rail Regulation
to pursue successfully exorbitant rail fares through the Competition
Act is very limited. We therefore recommend that the Government
review the regulation of rail fares and the definition of 'dominant
position' within the rail sector. The Government needs to ensure
that the power of the ORR to regulate exorbitant fares is meaningful.
(Paragraph 141)
The consensual approach to regulation
47. It is vital that the Regulator should have
the power and willingness to take effective remedial action swiftly
where problems arise. Although T-12 compliance is now acceptable,
the Office for Rail Regulation could have secured compliance by
Network Rail more quickly through a more forceful approach to
regulation. The Office for Rail Regulation must consider the efficacy
of a tougher regulatory approach. (Paragraph 147)
The Government considers that the current arrangements
for the regulation of railway fares and ticketing are satisfactory,
and that further changes and reorganisations would not be helpful
at this stage.
The changes brought about by the Railways Act 2005
were implemented in a way that retained regulation of all railway
fares and ticketing matters in one place. In particular, the 'Network
Benefit' arrangements for through tickets, telephone enquiries
and conditions of carriage approved under those licences are a
matter for the Secretary of State. The regulation of fares, railcards,
London area multimodal ticketing and rail staff travel is also
a matter for the Secretary of State, as it is implemented through
franchise agreements. Penalty fares regulation is also a matter
for the Secretary of State. As a result, direct day-to-day regulation
of aspects of railway fares and ticketing rests with the Department
for Transport as the prime funder of the rail network. The Government
regulates fares where it doe not believe that an effective market
exists.
The ORR is responsible for the enforcement of the
Competition Act 1998 and the Enterprise Act 2002. Although
the powers held by ORR are limited to matters concerning services
relating to railways, the Acts are applicable to all industries
when enforced by the Office of Fair Trading (or an appropriate
sectoral regulator with statutory concurrent powers). The ORR
would be able to investigate matters where it felt that it had
reasonable grounds to suspect that the Competition Act had been
infringed, or to refer a market to the Competition Commission
under the provisions of the Enterprise Act if it felt that it
had reasonable grounds to suspect that any feature or combination
of features of a market served to prevent, restrict, or distort
competition.
The hand over of an outgoing franchisee to a
new franchisee is legally classified as a merger. The merger control
regime is operated by the Office of Fair Trading (OFT) and the
Competition Commission (CC). The OFT has a statutory duty to review
the competition implications of any 'qualifying merger' and has
a duty to refer a merger for further investigation and possible
remedies to the Competition Commission if it considers that there
is a significant prospect that the merger will result in a substantial
lessening of competition. A new process has recently been agreed
between OFT, DfT, ORR and the rail industry. Bidders
for franchises will no longer have to notify OFT of their intention
to merge until preferred bidders stage, previously all pre-qualified
bidders had to notify. These changes have been introduced to
reduce the requirement for abortive work by OFT and the
bidding community. A streamlined process for information gathering
has also been agreed between the OFT, CC, DfT and ORR, which will
reduce the burden on the franchisee from participating in any
merger inquiry relating to franchise acquisition.
Conclusions
48. The Government famously now invests £87
million per week in the railways. This level of public subsidy
is given in recognition of the fact that the railways are a vital
public service. The subsidy places an obligation on those who
manage the railway to run it as a public service, and the railways
should also be managed so that they support important economic,
environmental and social objectives of the Government. (Paragraph
148)
49. Despite the unprecedented level of investment,
neither passengers nor tax payers get value for money. The current
system has had more than a decade to prove its worth, but in terms
of value for money and user-friendliness it has proven to be an
abject failure. Fares structures are chaotic and pricing absurd
because they are determined by commercial considerations rather
than considerations for the public good and the value for money
of passengers and tax payers. This is not acceptable, and the
current system is not fit for purpose. If the Government is committed
to the railway, it must at the very least use regulation to ensure
that passengers get value not only for their own money, but also
for the subsidy contributed by the taxpayer every year. (Paragraph
149)
50. The Government has done some good work in
terms of investment and the renewal of infrastructure of the railways
in recent years, but it has failed to honour its obligation to
passengers and tax-payers alike to ensure that the railways are
affordable and user-friendly, that all passengers get good value
for money when travelling by train. Although rail operators face
competition from other transport modes, they usually operate as
monopolies on individual rail routes. Both the Government and
the industry are happy to draw parallels with the no-frills airline
sector, and to see the booking systems and pricing structures
of that sector take hold in the rail industry. But the railways
are not like no-frills airlines, and neither should they become
like airlines. Passengers use the railway for a much wider variety
of journeys and situations than they would flights, and the railways
are part of the country's fundamental and essential infrastructure
for domestic travel. This is not a free market, and the Government
must flex its muscles to ensure that passengers get a fair deal.
It must ensure that a proper robust framework of regulation of
fares is maintained, and there is an urgent need for the Office
of Rail Regulation (ORR) to be granted better and clearer powers
to pursue exorbitant or unfair pricing by train operating companies.
(Paragraph 150)
51. We are astonished at the complacency and lack
of strategic thinking displayed by a Government who have accepted
all too readily a privatised railway which has put revenue and
profit before passengers over the past decade. The railways need
strategy and strong leadership, something which only the Government
can provide. The abolition of the Strategic Rail Authority and
the assumption by the Government of direction over rail policy
and financing was a good first step. But more needs to be done.
It is imperative that the Government now wakes up to its responsibilities
and starts to rectify the current vacuum by incorporating a coherent
policy on fares and ticketing structures into its forthcoming
White Paper on Rail. (Paragraph 151)
As discussed previously, the investment of £23bn
over the last Control Period and structural reforms introduced
by this Government have resulted in a railway that is safer than
ever before; operates in excess of 90% reliability; and has absorbed
a 42% increase in passenger numbers (on an already highly-utilised
network) within the last decade.
The majority of the additional costs of this investment
have largely been shouldered by the taxpayer, rather than the
fare-payer.
The Government does not agree that the current system
offers poor value-for-money. The comparators at paragraph 35 show
rail pricing competitively against a range of travel options each
of which offer a range of attractions and trade-offs, similar
to those which are made at different pricing levels on rail.
This supports the Government's view that an appropriate
balance is being struck between regulation and commercial initiative.
Where evidence suggests a need for passenger protection, fares
are regulated (this currently relates to over 40% of revenue).
Where that is not the case, fares are not regulated and the Train
Companies are free to set prices. In making this judgement the
issue of whether or not the operators have a significant rail
market share is a subsidiary measure if an effective external
market exists. Given that only 6% of passenger journeys (by passenger/km)
are by rail this appears to be the case, so on unregulated flows
(even those many flows that are not shared between operators)
rail actively competes outside its own market.
The Government does not accept that the result of
this is operators focusing on revenue and profit to the detriment
of passengers. In such an active market, such approaches are incompatible
with commercial success. However, the Government does recognise
the importance of the existence of this wider market to the success
and fairness of fares policies and will continue to keep market
conditions under review.
The present evidence strongly suggests that markets
do exist and that operators have sought to grow revenue by making
rail an attractive option. Broad support for this can be drawn
from the fact that growth in revenues and passenger volumes have
been broadly equivalent over the last ten years. This suggests
that, far from exploiting captive markets, revenue has been derived
from volume growth with yield per passenger marginally diminishing.
Levels of fares (pence/km) have risen 2.4% overall whilst regulated
fares have fallen 3%. The Government believes that commercial
talent has a role to play in attracting people to rail, and not
just public investment.
We wish to see these trends continue. For that reason
we are concerned about public perception and ticketing complexity.
Tackling the latter, we believe will help address the former.
In practice, and following a period of divergence,
rail fares do increasingly cluster around two or three simple
categories (Open; Saver; Advance, for long distance. Day single/return;
Cheap Day single/return for shorter journeys). But we accept the
thrust of the Committee's argument that there have not been sufficient
incentives among a disaggregated industry to formalise and market
this as a simple coherent structure across the network.
The Government will take action to bring this about.
We believe that clarity and consistency will help slay some of
the myths of rail pricing (e.g. that most cheap fares have to
be booked days or weeks in advance…); will allow passengers
to make better choices; and will give passengers a better perception
of the value rail offers - perception which appears to be significantly
driven by assumptions that the most expensive fares (which apply
to fewer than 1 in 5 of all trips) are indicative of the usual
experience for most people - whether turn-up-and-go, or otherwise.
The Government notes the Committee's intention to
return to this important topic later next year; fares and ticketing
will, of course, be an important element of the Government's rail
strategy also.
1 Car purchase price <£10,000 doing 10,000
miles/pa. Back
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